Great Story on Coming Collapse of Housing Bubble - from MSN no less!

[UdoKier]

http://moneycentral.msn.com/content/P108402.asp


Contrarian Chronicles
Housing mania will end in tears

Today's tales of rampant real-estate speculation sound just like what we heard at the peak of the tech bubble. And we all know what happened when that bubble burst.

By Bill Fleckenstein

This week, I thought I might bloviate about the bubble in real estate -- the catalyst being a spectacular article in the March 2 edition of the New York Times titled "Speculators See Gold in a Boom in Home Prices."

[On the Road]

1. I Think It's Starting Already

This is probably the peak in a lot of places.

[gizmo1979]

2. for it to have the same effect as tech

stocks wouldn't everyone have to try to sell their house at the same time,or everyone stop buying at the same time? It just doesn't seem like it would happen it such a drastic fashion.

[Warren Stupidity]

8. not really

'everyone' is a bit overstated. Even in the tech bubble 'everyone' didn't sell, you just had sustained downward sell pressure.

People living in their houses generally do not sell them (unless they have to) when the re market goes south. So a crash requires a large number of speculators to do the herd-thing and bail on queue. I think the reason we are seeing lots of predictions of a bubble ready to pop is that there is indeed quite a lot of speculative investment right now.

[applegrove]

3. Many predict low level deflation (of only 2%) or growth (of only 2%) in

the years to come for the West. So you do not want to have a big huge mortagage. Housing prices may come down. Think about all the boomers moving to condos, then moving to homes, etc.

[Cocoa]

4. prices rose 30% in one month in my town

Sarasota FL.

That can't be based on a sound foundation.

[ultraist]

19. 30% is a bubble that surely will burst. Bubbles are regional

The entire country is not one big bubble. Appreciation rates in my area remained consistent around 5% and sales prices increased only slightly more than previous years.

It is true though that when prices drop and bubbles burst, investors swoop in and buy, buy, buy! Low prices are a buyers market.

[SW FL Dem]

40. Yep! The buyers from Naples used to appreciation

are now driving up prices in Sarasota. For the past five years they have been financing lifestyles they can't afford by buying pre-construction priced homes and selling them after construction. It's amazing, there are lotteries to sell the right to buy overpriced homes, but the people buying them don't want to live in them. They want to double their money in 9 months. It has worked for the past 5-8 years, but now everyone is trying it. It can't continue for much longer.

[tuvor]

5. "Tech" ended up having nothing to actually sell. That's why it burst.

Isn't property pretty much at the other end of that spectrum? Forgive me for being wholly ignorant.

BTW when was the last housing-bubble-burst, anyone know?

[Warren Stupidity]

9. 86-87 although it was mostly a regional downturn.

[tuvor]

17. Thank you.

Is there a better historical parallel? Without one, isn't all this talk about speculators being wrong just...speculation?

[ultraist]

20. That eighties burst was mostly investors, when tax laws were changed

The last homeowner burst was in the seventies. Interest rates sky rocketed.

[Warren Stupidity]

41. it was pretty serious if you lived in the northeast

prices were depressed and stayed depressed until after the bush-I recession faded into the clinton boom. But it was mostly builders and speculators who led the charge - as it will be in any housing bubble - as they are the ones who are over-leveraged and can't take a prolonged dry spell.

But I'm no expert. Isn't one of the key indicators how long houses stay on the market? Anybody tracking that?

[SW FL Dem]

42. California had a huge bubble burst from 89- 93

Housing prices dropped by 50% or more. It had nothing to do with tax law changes. Price increases and interest rate increases made housing unaffordable. You need first time buyers to buy the starter homes before people can move up. When the total cost is too much, sales stop at the lowest level, but it trickles up.

Yes bubble are regional. There are places where prices have doubled or more in 2 years, that kind of appreciation cannot continue. In the 80s and 90s those areas were the northeast and CA. Now those places include Florida, Nevada, Arizona and several other areas.

[Gloria]

6. Bill Fleckenstein is the coolest dude...long hair, always ready to

blow your mind!

[madmark]

7. The bk bill is perfectly timed to coincide the popping of this bubble

[Jacobin]

12. Interesting, no?

At least the developers who owe boatloads of money will still be able to qualify for Chapter 7.

Chapter 13 won't help the poor middle class schmucks with mortgages of 125% of the value of their house, they won't be able to strip down their over-financed cars and they won't be able to file Chapter 7. Nightmare


This is going to be more 'fun' (in a sick way) than the oil bust in the 1980's that I lived through.

[tuvor]

16. Would you answer question #5, then, please?

You seem to know more than anyone else who's posted here.

Please tell me why this is comparable to the tech-bubble burst, when that was all about selling little more than hot air.

And can you tell me when the last such real-estate burst was? Warren Stupidity was helpful, but admitted it was regional.

I'm not trying to be a pest, here, I'm asking so that I might learn something.

Thanks.

[ultraist]

21. It is regional

Markets vary from neighborhood to neighborhood, city to city and state to state.

There are LOTS of bubbles in CA, for instance, but the entire state is not a bubble.

In the eighties, investors got slammed by new tax laws. The last time homeowners were hit hard was in the 70s when interest rates skyrocketed.

We wont see a huge increase in interest rates although they are going up. People who cannot afford their high mortgages will get screwed because IF they are in a bubble area and overpaid, they will NOT be able to sell for anywhere near what they paid.

If you are planning on selling, do it NOW because in most areas, there are not bubbles but prices are starting to decrease and interest rates are increasing. This creates a buyers market.

[tuvor]

26. Thanks very much, ultraist.

It's appreciated.

[Jacobin]

25. Have limited knowledge, but some experience

I've been a bankruptcy lawyer for 25 years, representing both banks and debtors. In the 1980's there was a huge oil bust and it affected oil producing states for years. Housing prices fell by half and didn't go back up for five years or more. It was exacerbated by the savings and loan crisis.

All booms end in busts. You can go back and look at historical charts of such run-ups and it doesn't much matter what the commodity is. There was a huge tulip boom and bust centuries ago that people still write about in northern europe.

Bottom line is that when people start saying things like "it can only go up it'll never come down" and "they aren't making any more land" its time to duck and cover.

The article in the first post explains it better than I ever could. Not a reason to panic if you have a house that is not financed for more than its worth and you plan to stay put. But real estate speculators who are heavily leveraged are in for some bankruptcy court time.

peace

[tuvor]

32. Thank you for your time, Jacobin.

I feel a little smarter. :)

[ultraist]

34. Real estate speculators who are collecting rent are seeing increased rents

Commercial property landlords took a huge hit right after 9-11. But rents are going up now as are occupancy rates in for commercial and residential properties.

We had horrible occupancy rates on our properties post 9-11 and have seen a steady increase since then. The national trend also reflects this.

But, any investor that over leavarges is doomed anyway. That is a really stupid way to buy. Landlord 101!

[SW FL Dem]

48. The last bust was late 80- early90s

What is evidence of a bubble? A 2400 sq ft house in my neighborhood just sold for 629K, last month a similar home sold for 489K. These are tract homes on less than a 1/4 acre lot. They are not custom, nothing special other than the fact that people here think that prices are going to continue to go up. I live in one of these houses, I wouldn't pay that for this piece of crap, the houses were slapped up, the walls aren't square, the windows leak. The 2200 sq ft house I paid 300k for 3 years ago would probably sell for twice that. I see a big bubble. I wouldn't buy a home in this overpriced market. Luckily I don't have to. Just wait until interest rates rise. When I bought my first home the 30 yr fixed rate was 12%, the 3 month teaser rate was 7.5%. These low interest rates won't last.

Land may not be hot air, but paying 600K for a 2400 sq ft tract home may turn out to be a paying a huge premium for a lot of attitude which IMHO is a lot of hot air.

[Lorien]

14. Yikes!

I didn't think about that, but you're spot on.

I wonder when this will hit? By the end of the year? Next year? I'm hoping to get my home on the market before the next hurricane season, and I don't think I'll buy again right away.

[FreedomAngel82]

29. Looking at

the gas prices and what's going on with that I think it'll be at least sometime in the next few months or next year at the latest sometime. :\ I think it will be a huge thing with jobs still going over seas and stuff.

[rucky]

61. Next step in our move back to a feudal society

um...I mean OWNERSHIP Society. yeah, that's the ticket.

[terry4kerry]

10. housing

In my parents neighborhood, a home that would of sold for $300,000 around 2001-2002 was on the market for $650,000 recently. It is just incredible. They live near Philadelphia, where the housing market boom increased prices more rapidly then any other area in the U.S.

[jedr]

22. very regional;

$650K would buy you most of Allegheny county

[JDPriestly]

30. $650 K will buy you a nice

but ordinary, run-of-the mill three bedroom house maybe with a family room in a fairly nice but not really good neighborhood in L.A. But, move fast, because the sign won't be up for long.

[Jacobin]

11. Booms are followed by busts and this one will be a doozy

[PROGRESSIVE1]

13. The last bubble we had in real estate 88-90 will be nothing....

compared to this one.

[lovuian]

15. This is due to the Interest rates being at record lows

and no matter what Real Estate has created incredible wealth for Americans... I have to agree though it has gotten incredibly crazy!!!

Interest rates going up will kill this bubble and its coming soon!!!

[sendero]

27. Not only are interest rates very low..

... but as the article alluded to, financing of homes has become absurdly lax. Folks can buy a house, a huge house, with not one dime down. They will even roll the buyer costs (survey, legal, other fees) into the loan.

It is nutty. If you don't have 5% to put down you probably don't have any business buying a house. What happens is you get tons of folks who overextend themselves to buy, and when one itty bitty disruption in the cash flow comes along, they start defaulting payments.

When properties, even a relatively small percentage of a market, start going to foreclosure it depresses prices in the market overall. Prices cannot rise when there is a fire sale. The area I live in has had little price appreciation since 2000, probably because I live at ground zero of the tech dot-com telecom bust and there are lots of foreclosures in nearby Plano.

I agree with the author completely. This is a classic bubble, though it is also a regional one - not every part of the country is affected. It has been brought on by low interest rates, exascerbated by lax lending requirement for home buying and for home equity loans.

It's going to end badly, there is simply no other way for it to end.

[gulfcoastliberal]

18. There should be some great foreclosure sales soon!

NT!

[jedr]

23. sister-in-law is an abstractor;

most of her work is now foreclosures

[ultraist]

28. Yep!

As long as interest rates don't go up too much.

But again, the saying, "location, location, location" holds true.

It also depends on what type of real estate. For instance, commercial and residential investment properties saw a huge hit post 9-11 and rents and occupancy rates are just now starting to go up. As interest rates go up, rents typically increasee (fewer can afford to buy). Appraisals factor in gross rent mulitiplier, so the less rent, the less value.

It will be the homeowners who are hit with this hardest, not investors. Banks will also have to eat a lot of defaulted home loans. It will also run out some developers and builders as the market slows.

[FreedomAngel82]

31. Most definietly on locations

Two/three terms ago I had a writing class and a girl moved down here from Pennsylvania and she said buying a house down here was like chump change compared to up there (I'm in TN).

[ldf]

24. it will be a bust everywhere except

the major, hot, big cities.

there will always be the superrich who aren't affected, who still will want a manhattan apartment.

lots of buildings going up in nyc, and NONE of them are even remotely related to "moderate" prices.

a three bedroom apartment in a nice area could go for two to three million.

unfortunately the boom/bust will not bring down prices here.

[FreedomAngel82]

33. I won't be surprised

My town is already having a lot of trouble with our economy and budget and my state as well. Nothing in Bush's policies have been helping us. *sigh*

[JDPriestly]

35. Actually, the top -- the high-priced,

market usually crashes first. Gradually, the lower priced houses also lose value. That's because people move down. The first out manage to sell their houses without big losses. If they are smart they buy a cheaper house before they sell their old, too expensive house or let it go into foreclosure. That's how they can buy down. I would not do that, and I would not recommend it, but that is what our neighbors did during the last housing crash in L.A.

[ultraist]

36. There are other pockets of growth that will not be slammed

Areas that are seeing the highest rate of business growth, like the RTP area in NC.

But, yes, markets in cities like NYC and SF will not burst. Rents are also outrageous in those areas. And there is an "urban trend" happening which will further jack up rental and sales prices.

[Digit]

45. You think prices have been rising in RTP?

You kidding me?

[ultraist]

54. Yes they have. According to all stats

Prices and sales are up this year. Of course, location applies here as well. In some neighborhoods, prices were stagnant, but overall prices are up.

http://www.ncrealtors.org/marketingstatistics.cfm
For the fourth year in a row, sales of existing homes in North Carolina broke records in 2004, posting a 21 percent increase from sales recorded in 2003. More...


Raleigh was rated very high by several studies on business growth.

Here's a few articles on the growth:

http://www.visitraleigh.com/media/accolades.html
Raleigh Ranks Right On Top
RALEIGH, N.C. (January 2005) -- North Carolina’s Capital City area certainly makes the grade when it comes to positive accolades. Over the past five years, numerous third parties have praised Raleigh for its quality of life, excellent education, entertainment options and business climate. After all, Raleigh embodies, “City Life, Carolina Style.” Among Raleigh’s most notable accolades:

[BigBearJohn]

37. Oh great. Then everyone sells and the bottom falls out. Germany 1945.

[ultraist]

38. If everyone sells, landlords will rake in

Everyone needs a roof over their head.

That article refers to "speculators" who are buying with 100% financing and feeding the properties (rent doesn't cover the costs). A bunch of novices have flooded the market because they are afraid of stocks.

Old school landlords do not do 100% financing nor do they buy properties that don't break even from the start. The only time that is feasible is if you are going to do a flip it and then you have to pay out 35% of profits to capital gains unless you do a 1031 exchange.

You have to live in a property for at least two years to avoid capital gains, which means, you will always pay capital gains on multi-unit properties (unless you do a like kind 1031 exchange).

I don't think regular homeowners are going to start selling like crazy except those that are forced to downsize.

I do think personal foreclosures are going to increase quite a lot though.

[SW FL Dem]

39. I've seen it coming for at least a year

Prices are going up like crazy around here. Price jumps of over 10K a month aren't unusual and we are talking modest 1800- 2400 sq ft tract homes on tiny lots. People are buying homes to be built and selling them before they are completed. Not a bad deal if you put 30K down on a contract to buy a completed home and before you take out the mortgage, you sell the house for 20K or more than you paid for it. Many of our neighbors are financing lifestyles they can't afford by buying houses on spec. Something has got to give when these homes are already in the 400K-600K+ range. How many families can afford a 400K+ home? Interest rates are rising, what about people who took out adjustable rate mortgates? What are these people going to do when the homes they are buying don't sell and they have to pay 2 or 3 mortgages (not to mention the car lease payments for 2 SUVs)?

It's happened before in recent history (Northeast late 80's CA early 90s. My family lost a lot in the last burst. At least this time, my house is one of the smaller ones, and we haven't borrowed against it.

[ultraist]

43. They do have to pay 35% capital gains on those flips and closing costs

Personal debt is at a historic high, many of those people who have over extended themselves are going to get foreclosed on. Carrying 3 mortgages on one property is insane.

[Tactical Progressive]

44. What is the capital gains rate

on residences lived in for more than two years?

And isn't there some kind of exemption if you turn the money over into new property within a year or so?

[Mr Rabble]

49. no cap gains after 2 years as primary residence

or you can do a 1031.

Actually, a change of job title could shield you from cap gains. There are more than a few ways out of paying cap gains.

[Tactical Progressive]

58. None at all?

I think there's a limit on that - $250K from I_Make_Mistakes.

What's a '1031', and out of curiosity, how can something as superficial as a change of job title affect your tax burden? I'm guessing that's somehow not geared towards regular working class jobs.

[ultraist]

60. Job change does NOT get you out of capital gains

A 1031 exchange is simply buying another property of 'like kind' and it defers captial gains. Once you sell that property you will have to pay capital gains IF it is not your primary residence.

You must live in a property for at least two years to be exempt from capital gains. This is not possible with multi unit buildings.

IF the PROFITS of the sale of YOUR home, that you have lived in for at least two years, exceed 250k and 500k, then you will have to pay some capital gains.

http://www.taxesindepth.com/capital-gains-real-estate.html

The profits from selling real estate are fully taxable as capital gain, unless the property sold qualifies as your primary residence.

In addition, the profits from selling your house are recorded on Schedule D if they exceed the maximum allowed capital gain for a primary residence.

This means that generally, the sale of your primary residence is not considered a capital gain, unless you make enough money on the sale to surpass the IRS "profit threshold".

If the sale of your house makes a profit that exceeds $250,000 for unmarried taxpayers or $500,000 for married taxpayers, then you must claim a portion of the profit as a capital gain.

Your profit is figured by taking the amount you sold the house for and reducing it by the cost of the sale and the cost of the house. These costs can include:

[ultraist]

55. You don't have to pay any capital gains if you live in the property 2 y

The capital rates gain if you hold it for one year is less than 35%, but I'm not sure exactly what it is. I think it's around 24%.

[SW FL Dem]

46. These people aren't paying on one house - it's 2 or 3 at a time

One on their home, one home equity loan on their home to pay the down on the spec home and the mortgage on the spec home until they sell it.

[I_Make_Mistakes]

47. To TP

I spoke to the IRS within the last 3 years concerning Capital Gains. The law has really changed. There are 3 qualifying situations that have to be met, and unfortunately, I only remember 2.
1. Net Gain.
a). Single:

if the selling price of your home less the price you paid is less than $250,000.00 no tax. (But must meet other 2).

b). Married:

if the selling price of your home less the price you paid is less than $500,000.00 no tax (But most meet other 2).

2. Residence requirement.

You must have resided in the property for 5 yrs. (They did have other schedules for less then 5 yrs.) I think, 3 or 4 under certain situations would also qualify.

And, darn it if I can remember the other qualification, but, I am pretty sure it was less restrictive than the other 2.

I just know that it wasn't an issue for me.

However, with this new ruling, there are no write-offs, period. Nothing can be deducted, realtor costs, repairs, etc.

Like, I said this is 3 years old, but I called the IRS and this was their qualifications.

And for those of you who learned to hate the IRS, they helped me recap $2000.00, based on a bad tax preparers advise.


Edited, qualification 3, primary residence. After reading the interim replies, I realized, that the 3rd requirement was primary residence. The late 80's early 90's bubble that I got caught in, was realtors who lost their shirt in investment properties. They started dumping their properties, and kept our values low.

[Tactical Progressive]

52. Thanks

I know someone in the process of hopefully selling her home in California. The prices have gone way up since interest rates dropped, so she'll be taking the gains and buying a house in Florida. Unfortunately someone here said that the Sarasota area had housing inflation of 30% recently too, so it looks like even if your house appreciates, you have to buy an appreciated house somewhere else.

From your information it sounds like a $250k cap gains exemption. Plus there is supposed to be some kind of rollover exemption into a new home. On the other hand I think she mentioned something about California state taxes. Not to mention real estate agent fees. When housing prices shoot up, those people make alot of money. But I remember the housing crash of the early '90s when they weren't selling hardly anything at all here in the Northeast. They live on the bubble.

[ultraist]

62. If the PROFITS exceed 250k not the sales price, big difference

If she has lived in the house as her primary residence for at least two years and makes a profit less than 250K, she does not have to pay capital gains. If the PROFIT exceeds 250k, after closing costs, then a PORTION of that profit will have to be declared for capital gains taxes.

[ultraist]

59. It depends on what kind of deal they got

If they can afford the mortgage payments and make a profit when they flip it, they've bought well.

If people are too reckless to research the market and buy too high, then likely they will lose their shirt.

Seasoned investors don't need to use their personal home equity to buy. That right there tells you these people are novices. Additionally, it's likely they are paying too much if they are buying AFTER it's on the open market. Furthermore, most experienced investors buy properties in LLCs so that they don't risk their personal assets.

That article was not about experienced investors.

[Phoebe Loosinhouse]

64. you know it's coming when:

All people do is talk about how much their house has appreciated or how much the house down the street sold for. Plus common sense tells you there has to be some upper limit. Ok, your 200K home last year is worth 400K this year, will it be 600k next year and 800k the year after that? Is your mediocre tract home going to be 2.5 mil in 7 years? Absurd. And where is the raise in incomes and wages to to support the raise in prices?

Real estate has been supplying CPR to an economy that is on life support. The stock market has been flat for years, the dollar is sinking, job growth has not kept pace with the most basic growth needed, manufacturing is in the tank. But hey, we're all wealthy in the real estate bubble. It is all an illusion. The scariest thing is people with little or no real equity leveraging themselves in order to buy more bubbled real estate or motor homes or vacations or whatever else they think their bloated lifestyle neccessitates.

[Bigmack]

50. Bubble?

We have a house in the Puget Sound area and we have a small place where we spend the winter in a small SoCal desert town.

Both places are about 2 hours from large metro areas... Seattle and San Diego.

Real estate values have skyrocketed in both places because boomers are starting to sell their "city" houses for a bundle. They then buy a place in the "sticks" for about half of what they sold for, and take the rest and buy winter (or summer) places and motorhomes and big boats.

I don't see the value of real estate in either of my home areas going down, since there's an endless supply of retiring boomers.

Both areas are beautifully rural, but still relatively close to the amenities available in major cities.

Will this continue? Comments?

[ultraist]

56. There are peaks and lows in every area, the market fluctuates

But it sounds like your area wont see any real lows, just dips. And the appreciation rates fluctuate as well. If you ever sell, keep your eye on the current market, a year or two can make a big difference. What are the current appreciation rates in those areas?

I wouldn't sell now though, vacation home sales have dropped. The best time to sell a vacation home is when the economy is booming. Second homes are the first to go when times get tough.

[lovuian]

51. I wouldn't be surprised if Bush takes away the Mortgage deduction

that would kill the housing market!!!

[I_Make_Mistakes]

53. TP

Here is my take. Tell your friend to sell her property, and invest. I too am looking to move to FL. Either rent or buy, an investment property. When interest rates rise, property values decrease, so, don't lock in.

If your friend, can get a HIGH value for her existing property, tell her to put it in a safe investment, and watch as the interest rates rise, property values plumment. Then buy a property dirt cheap and buy cash. If the interest drop like the past few years, refi, if not, the write off is good, only if, it is greater than the current rate of return.

[Tactical Progressive]

57. That was my advice too

Rent for a year or so until interest rates rise. The problem with that is twofold. First, housing prices are still going up there and may not go down soon. How much appreciation will you miss out on? Maybe too, housing prices will hold relatively steady in a downturn there. Every location is different. Second, who knows how fast interest rates will rise. It may take a couple or a few years.

Additionally, there is something about tax advantages to rolling over residential appreciation into another house. There is some kind of time limit on that. You have to buy a new home within a year or two.

So it's not a cut and dried strategy to wait for interest rates to depreciate housing, unless this bubble is a major collapse, starting soon and progressing relatively quickly, in that particular locale.

The investment home is the latest idea we've been bandying about.

Sounds like our thinking is paralleling your's.

[ultraist]

63. It may not be wise to wait to buy

It totally depends on the local market. Increasing interest rates do matter as well.

If the area is seeing a bubble, over inflated prices, wait to buy. If it is seeing steady and stable increases, buy now and lock into a lower rate. Interest rates are going to keep increasing. They have been for months now. (Very few people can afford to buy with just cash. Most people don't have 200-300k in liquid).

What else is going on in that area? Check the info on business growth. If an area dries up, business wise, real estate values plummet. (Ghost towns). This happened in Detroit when the auto factories left. You can scoop up cheap city property there, but there is no real recovery in sight.

Furthermore, she will lose her opportunity to not pay capital gains if she doesn't buy within a year. How much will that cost her?

Where is she looking to buy?